Liberate Technologies has signed a deal with Charter Communications to get its interactive TV software into the cable giant's digital
set-top boxes.

The deal, announced Thursday, is potentially a huge boon for Liberate. The company, which is competing with Microsoft and OpenTV for the set-top market, will potentially have access to Charter's 7 million cable subscribers. Up to now, Liberate has shipped about 1.1 million copies of its software.

But the deal comes with an initial cost. On Thursday, Liberate also issued an earnings warning and tied it directly to its agreement with Charter. San Carlos, Calif.-based Liberate will incur an extra $2 million in expenses for marketing research, infrastructure testing and staffing related to the new deal, the company said.

Liberate now expects to lose 13 cents to 15 cents per share in its current quarter, with sales of $14.5 million to $15 million. Last week, the company said it expected to lose 11 cents to 13 cents in the current quarter. Its revenue estimates didn't change.

A consensus of analysts was expecting the company to report a loss of 12 cents per share and revenue of $14.55 million in the current quarter, according to First Call.

William Bean, an analyst at Banc of America Securities, described the Charter agreement as a "huge deal" for Liberate. "If they had this signed earlier, they probably wouldn't have had to lower (estimates) today," he said Bean, who maintained a “strong buy” rating on the stock and a price target of $30.

Liberate also revised its estimates for its fiscal year, which ends May 31. Liberate said it expects to report a pro forma loss of 37 cents to 39 cents per share and revenue of $50.1 million to $50.6 million. The First Call
consensus had been for a loss of 36 cents per share and revenue of $50 million.

The company said its earnings target for fiscal 2002 will remain unchanged, as will its expectation of profitability in fiscal 2003.

The deal calls for installation on a minimum of 300,000 set-top boxes. It will begin in St. Louis, where Charter is headquartered and where the two companies already have a pilot program. Billionaire Paul Allen, a Microsoft co-founder, is Charter's principal owner.

Charter's digital cable customers with Liberate-based set-tops will initially get such items as Internet access, an interactive program guide from TV Guide and e-mail and portal
services from Digeo, which is Charter's interactive services provider.

Set-top boxes with Liberate software will be in at least two major markets by the end of the year, Stephen Silva, senior vice president at Charter, said during a conference call.

The real opportunity for Liberate will come via Charter’s 1.1 million digital subscribers in the United States, said ING Barings analyst Spencer Wang, who has a “buy” rating on the stock.

“Charter's digital subscriber base is projected to increase to about 2 million by year-end 2001,” he wrote in a research note.